Swan sets up cuts to protect surplus

Government programs will be either cut or wiped out in the upcoming federal budget as the government strives for a surplus in the face of dwindling tax revenue, the Treasurer, Wayne Swan, will warn today.

In his first major speech setting the scene for the May 8 budget, Mr Swan will say delivering a surplus next financial year, as the government has promised, is an economic imperative.

To suggest it was a political strategy was ''misleading and ill-informed'' and ''rubbish'', he will say.

With economic growth returning to normal, a surplus will help ease pressure on the dollar and give the Reserve Bank greater flexibility to cut interest rates as stimulus should there be another economic global downturn.

Mr Swan will tell a business breakfast in Sydney that ''we will need to cut and cancel existing programs if we are to meet our targets and we'll need to redirect some spending to where it is needed most''.

''Because the surplus is a vital economic objective and because revenues are being written down, we need to find even more substantial savings than we had earlier anticipated.''

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Privately, sources say the government is concerned that the opprobrium it will wear for the budget cuts will outweigh any kudos it receives for achieving a surplus and, consequently, will stress between now and the budget the benefits of a surplus.

At the midyear budget update released late last year, the Treasury forecast a $37.1 billion deficit for this financial year, followed by a $1.5 billion surplus for next year, 2012-13.

Mr Swan will say today the revenue picture has worsened since then due to a combination of the European sovereign debt crisis, consumer caution and a continued high dollar. These combined to produce a 6.5 per cent reduction in company profits, meaning less company tax.

Mr Swan will say longer-term factors mean that even as the economy recovers, tax revenue will remain lower than it was before the global financial crisis when ''revenues were at an unsustainable peak''.

Back then, the mining boom and strong household consumption were feeding government coffers to the point that tax receipts accounted for 24.2 per cent of gross domestic product.

That ratio fell to 20 per cent due to the financial crisis and is expected to rise back to only 22.8 per cent by 2016.

Mr Swan will say that if the ratio were the 24.2 per cent Labor inherited from the Coalition, the forecast budget surplus for next year would be $23 billion, instead of $1.5 billion.

The reasons for the long-term reduction in tax revenue are that households are saving more, company losses from the financial crisis are now being claimed against current profits, and miners are investing heavily and claiming significant tax reductions.

''Simply put, the consumption boom that characterised the years leading up to the global financial crisis has been replaced by an investment boom, driven by the mining sector,'' he will say today. ''We can expect a lower share of corporate tax to GDP for some years to come.''

But this morning shadow treasurer Joe Hockey expressed doubts that the budget would be as tough as Mr Swan was predicting.

"Well, this is like Groundhog Day. Every budget Wayne Swan has delivered, before each budget he promises Armageddon, then we get a series of confused, deliberate leaks from the government and then we end up with a budget that looks nothing like what the actual outcome of the budget ended up being," Mr Hockey told ABC radio.

"It'd be the first tough budget he's had if it's a tough budget and I just think in this case, a Swan's not going to change his spots."

Budget speculation will again surround the 50 per cent childcare rebate, a $1.7 billion annual measure and one of the last areas of so-called middle-class welfare yet to be means tested.

Yesterday the Childcare Minister, Kate Ellis, appeared to rule the rebate off-limits by daring the Opposition Leader, Tony Abbott, to means test the rebate to find the money for his promise of extending the benefit to nannies.